Last week, we discussed the hope of a “magic price” – and determined it is in fact nonexistent. So, if this is the case, why bother to think hard about pricing? The answer: Because pricing is the most powerful lever you can use to increase your profitability.
Let’s go through an example.
Using Pricing as Leverage for Higher Profits
An average Subway franchise may see around $365,000 per year in gross sales. However, by the time the food is purchased, royalties are covered, labor, rent, and other overheads are paid, the owner may only walk away with $60,000 in profit.
If the owner is able to raise prices on average by 5% (without decreasing volume), then revenue will go up by $18,250. Since the expenses don’t go up, the owner pocketed the whole increase, and now earns $78,250. This is 30% more take-home income for the Subway owner. The mere 5% increase in price generated a 30% increase in profit. That’s leverage. Powerful leverage.
Although Subway is a well-run franchise, sometimes there may not be an opportunity to increase prices at all. But what about your business? Most businesses have the opportunity to improve their pricing (and resultantly, their profitability), you just need to find them.
Follow this process to leverage your pricing now:
- Work out how much annual revenue and profit your business makes each year.
- If you increase your revenue by 5% without increasing your costs, how much additional profit would you earn?
- What’s one thing you can do in the next 30 days to work toward this?
